VCs should want to hold early-stage companies more accountable

If the last year has taught us anything, it’s that VCs let their portfolio companies get away with a lot.

No balance sheet? No problem; here’s a $32 billion valuation. No proven product-market fit and your last venture cost investors billions? Here’s a check worth more than all Black founders raised in 2021’s otherwise record-breaking year. Cut a check for Elon Musk’s Twitter acquisition when he’s never built in that space before and has a reputation for treating employees poorly, why not?

One can only imagine the messes we don’thear about.

Venture capital has a history of choosing potential profits over doing the right thing, but in many cases, this intentional lack of accountability over a portfolio company’s sore spots or issues ends up biting the investor down the line. It could also end up hurting their LPs when things inevitably start to crack.

Usually we — as in, those who aren’t working at, or investing in, said startups — don’t hear about these instances until it’s far too late. A startup is worth over $1 billion, and only then do we learn about the employees and stakeholders being affected by the company’s missteps or leadership shortcomings.

But it doesn’t have to be this way.

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Sure, there is definitely an argument to be made that it wouldn’t be worth it for early-stage VCs to spend so much energy on each portfolio company; many will likely fail before making it past the Series A. Plus, as Eric Bahn, co-founder and general partner at Hustle Fund, told me last week about dealing with a problematic CEO, there isn’t much upside to calling out bad behavior in the VC industry. It can make the other VCs involved look bad or make an investor look hard to work with, but VCs also get backlash for not calling bad behavior out.

Mistakes happen, but if the company was going to make it to the later stages anyway, the issues that arise in the process — like a toxic culture or bad bookkeeping — can generally be fixed relatively easily if caught early enough.

Nipping problems in the bud early is important. I’m reminded of a conversation I had last year with Richard Kerby, a co-founder at Equal Ventures. We were speaking about diversity in venture capital — well, more about the lack thereof — and how firms could remedy this by placing an emphasis on hiring diverse candidates from the start.

He aptly replied that if firms didn’t start thinking about it from the start, they were “fucked.”

This can be applied to many different areas, like balance sheets, business models and leadership styles. There are things that can be fixed when a team is small that would be much harder to solve if left to grow bigger.

While early-stage investors don’t always have the authority to dictate how a company operates — compared to, say, a board member at a later-stage company — they always have the power to not invest in the next round and be honest about why.

This keeps employees aligned, too. People don’t want to work somewhere that is riddled with issues — regardless of how far along the company is. Not holding startups accountable for their actions early on may lead to a toxic culture, and people talk; nobody will want to work for a company that doesn’t have a good reputation.

If VCs hold their portfolio companies more accountable from the start, not only would it prevent future problems, but it would also likely help build better businesses that are equipped with stronger governance structures, better business models and solid balance sheets. And that kind of sounds like the recipe for better returns, right?